Profitability and Profit-Sharing

Claims that profit-sharing is a purely distributive wealth confiscation scheme without incentive effects (due to free-rider problems) are based on neglect of cooperation and interaction in the workforce. When these activities are difficult to monitor directly, group incentives such as profit-sharing can increase efficiency and maintain a superior Nashequilibrium with strictly individual optimization. With simultaneous WLS-Tobit estimates we find here strong effects of profit-sharing and worker ownership shares on residual owners' return on capital in medium-sized metal working firms in West Germany, complementing earlier results on productivity.